Personal Finance: Trouble on the 401 Front

Employers have begun to discover troubling racial differences within their 401(k) retirement plans, a gap they say could leave today’s Black workers far less financially prepared for retirement than whites. Investor surveys and research by two large employers strongly suggest that Blacks participate in retirement plans at far lower rates and are much less likely than whites to invest in the stock market. An industrywide study of 401(k) plan activity by race has never been conducted.

Exelon Corp., the country’s largest operator of nuclear power plants, discovered in 2007 that about 15 out of every 100 Black employees did not participate in its 401(k) plan, compared with around 10 of every 100 whites. It also found that one in three Black employees contributed less than 5 percent of their pay to the plan, compared to just 14 percent of whites. “We have to start addressing that now,” says Andrea Zopp, Exelon’s senior vice president of human resources. “If African-Americans are not investing at the same rate, they will be behind,” she says.

McDonald’s Corp. discovered in 2004 that only half of its Black store managers contributed to the company’s 401(k) plan, a lower percentage than whites. The company reversed the trend by automatically enrolling store managers into the plan. Today, 95 percent of Black restaurant managers are plan participants.

Few employers today peer into their plans in search of racial or ethnic differences, as they are required to do for discrepancies between high- and low-income workers. Fidelity Investments and Vanguard Group, two of the country’s largest retirement plan operators, both publish encyclopedic volumes on America’s investing habits that lack any reference to race or ethnicity. Experts attribute lower investment rates to poor instruction on financial topics in public schools and misconceptions about the risk of stocks within parts of the Black community. Employers have also been urged to tailor their messages on retirement savings to account for what some Black and Latino executives say are important cultural differences. And the federal government has been urged to strengthen its national strategy for financial literacy, which has been criticized as ineffective.

A survey by Charles Schwab Corp. and Ariel Mutual Funds concludes that four in 10 African-Americans with household incomes of $50,000 or more have no money in stocks, compared to just one quarter of whites. Ariel’s survey also found Blacks who enrolled in retirement plans save a median $173 a month while whites save $252. The survey was administered in June and July and has a margin of error of about 4.5 percent. A separate survey of retirees found whites are nearly twice as likely to have $100,000 or more saved than Blacks, even when education, peak income level and other factors are held constant.

“There are clear differences between Blacks and whites: How we think about money, where we save and invest our money, what we do with our money, and how we're influenced as to what we do with our money,” says Mellody Hobson, president of Ariel Mutual Funds.

Since the 1980s, 401(k) plans have replaced traditional pensions as the preferred retirement offering among employers. This shifted the responsibility—and the investment risk—to the employees, who are expected to contribute a portion of their paychecks before taxes. They can choose from a menu of investment options offered by their plan administrator, and some employers also match all or part of the employees’ contributions. Laws governing such plans allow plan providers to offer financial education to employees, but limits the kind of advice they can give. As a result, workers are largely expected to decide for themselves how much to save and which investments to choose.

The decline of pensions may disproportionately affect Blacks. Two-thirds of employed Blacks surveyed by Ariel and Schwab in 2006 worked for employers that offered pension plans, compared to half of employed whites. As employers make the switch, Blacks may be less experienced in handling their own retirement investments. Research conducted by companies handling retirement plan record keeping found striking differences. Hewitt Associates found race was a more powerful predictor of an employee’s retirement plan activity than age, gender, work experience or income, says Andres Tapia, Hewitt’s chief diversity officer. As a result, Hewitt plans to launch workshops for clients’ Black and Hispanic employees.

Great West Retirement Services has concluded from researching the behavior of 20,000 of its own and clients’ employees that Blacks are more likely than whites to cash out of retirement plans when leaving a company, incurring penalties and taxes, instead of rolling the money into a tax-deferred individual retirement account. It also found that its clients’ Black employees allocate their retirement savings to far fewer investment types than whites, Latinos and Asians, suggesting a lack of diversification.

McDonald’s is now considering allowing Ariel employees to give educational sessions to its Black employee network in the hopes they can better tailor the message. “We found that people will listen more intently to people who are talking from within their network,” says Rich Floersch, McDonald’s chief human resources officer.Ethnic and racial groups approach saving and investing differently, says Hewitt’s Tapia, who was raised in Peru. For instance, “long-term,” suggests a shorter time horizon to immigrant Latinos accustomed to political instability and high inflation that made long-term planning seemingly impossible, he says.

There are also lessons in the demographics of the Black community, says Ariel’s Hobson. A larger percentage of African-Americans raise children in single-parent households, care for aging parents and have non-immediate family members in their homes, she says. “That old saying, ‘it takes a village,’ that’s very, very clear in the Black community,” she says.Historical factors may also play a role in Blacks’ preference of real estate over stocks. Racial discrimination by mortgage lenders may have heightened Blacks’ interest in owning a home. Blacks’ lack of participation in retirement plans can put employers and the financial services industry on the defensive, says Lisa Toppin, Charles Schwab’s vice president for employee development. “We need to push past the discomfort. Everybody ought to feel a certain level of anxiousness around America’s preparedness for retirement, because every chain is as strong as its weakest link,” she says.

“We need to push past the discomfort. Everybody ought to feel a certain level of anxiousness around America’s preparedness for retirement, because every chain is as strong as its weakest link.”—Lisa Toppin, Charles Schwab’s vice president for employee development

Edward Giltenan, a spokesman for the Investment Company Institute (ICI), declined to commit the mutual fund industry’s trade association to conduct research on race. But he said the industry played an active role in pushing through pension reform last year to encourage employers to automatically enroll their workers in 401(k) plans, increasing participation. It has also supported financial literacy programs for minorities. But more needs to be done, he says.

Hobson hopes the company’s survey, which has been conducted for a decade, will finally prompt more research and discussions over the gaps. “We have ten years of this data—year after year the same story,” says Hobson, who sits on the ICI’s board. “It’s not like this is some kind of fluke.”